Texas Leads Antitrust Fight Against Google

Could pressure from states force the company to blink?

Spurred by complaints that Google manipulates its online results and advertising rates to disadvantage rivals, a powerful regulatory body launches a sweeping antitrust probe that could alter the business practices of the world’s leading search engine. It reaches out to domestic and international websites to document their grievances and clashes with Google over access to internal documents. Soon, it must decide whether it has enough evidence of anticompetitive conduct to pursue a settlement that could impose monetary fines and conditions or litigation that might spark a protracted court battle.

This may read like a description of the Federal Trade Commission or European Union, which are separately investigating allegations of unfair behavior by Google. It’s actually a portrait of the office of Texas Attorney General Greg Abbott, which initiated a formal antitrust review of Google in July 2010, four months before Brussels acted and nearly a year ahead of Washington. Though the FTC and EU are widely viewed as leading the way, Texas and a handful of other states quietly scrutinizing the company could play wild card roles in determining its fate, antitrust experts say.

“Their power comes when they unify,” Albert Foer, president of the American Antitrust Institute, says of states. “If they work together, then they’ve really got some stature to affect a national case.” The substantial impact that states can have in antitrust disputes was illustrated fourteen years ago when 20 state attorneys general joined a Justice Department lawsuit alleging that Microsoft abuses its market power. Justice and half of the 18 remaining states settled with Microsoft in 2001, while the rest sued for tougher restrictions before they settled. Several states would later play key roles in enforcement of conditions imposed on Microsoft and the extension of some requirements. Foer says the AGs held Justice’s “feet to the fire” to ensure it brought a strong suit.

Among the states wrangling with Google, Texas looms large. Its inquiry explores whether the Silicon Valley giant uses its monopoly power to favor its content and services -- a theme central to the FTC probe. In June, Abbott filed a civil suit against Google that seeks access to documents the company allegedly refused to provide. Texas also is part of a multistate group that includes California, New York and Ohio that monitors Google’s business practices and could be ready to pounce if momentum builds toward litigation, sources say, with Oklahoma reportedly weighing a probe.

Details about the group are sketchy because the AG offices either declined comment or did not return calls, though an Abbott spokesman did confirm Texas’ participation. The National Association of Attorneys General, which declined to address suggestions that it oversees the group, is said to play an administrative, but not investigatory, role. To streamline their reviews, and potentially coordinate outcomes, the FTC and the states collaborate closely, antitrust and industry sources say. Such interaction is routine with major antitrust investigations, a commission attorney confirms.

Mississippi, meanwhile, hired Cohen Milstein Sellers & Toll PLLC, a prominent Washington, D.C., law firm that describes itself on its website as “one of the largest plaintiffs’-side antitrust practices in the country,” to assist with a separate but related review, say sources familiar with the inquiry. The Mississippi AG’s office would not confirm or deny an investigation and did not answer questions about the law firm. Cohen Milstein filed a class-action lawsuit in 2010 that accuses Google of violating federal wiretap law in 2007 when it mistakenly collected personal data such as e-mail addresses and passwords via unsecure Wi-Fi networks while gathering images for its online maps. The suit is pending. A spokeswoman for Cohen Milstein says the firm “is contractually bound not to comment on cases involving any state’s Attorney General’s office.”

Stephen Houck, a New York-based antitrust lawyer and Google adviser, argues that parallels should not be drawn between the antitrust probes of Microsoft and Google. At this juncture in the Microsoft case, states had committed substantial resources and were determined to proceed regardless of what Justice did, says Houck, who served as lead trial counsel for state plaintiffs in the federal suit against Microsoft. “I don’t think this is at that stage, certainly nowhere close to that,” he says of state scrutiny of Google.

That could change, however, if Texas signals it’s serious about a legal challenge. “Their contemplation of litigation, and [any] move to litigation, might spark a run of states joining them,” predicts Patrick Lynch, who served as Rhode Island’s AG from 2003 to 2011 and is now on retainer for Expedia and a consultant to the Microsoft-backed Fair Search Coalition, two of Google’s staunchest critics. “I’d be surprised if Texas just says, ‘Google has a clean bill of health.’ It’s far, far more likely that they indicate something else, I think most likely in litigation,” he says.

Congress paved the way for states to pursue antitrust cases with national consequences through a 1976 revision of the Clayton Act antitrust law that permitted AGs, once limited to antitrust enforcement, to sue on behalf of citizens and consumers, explains Bill Peacock, vice president of research for the Texas Public Policy Foundation, a free-market think tank. Peacock worries that AGs hinder competition when they protect special interests, such as companies based in their states; use investigative proceedings to regulate; and force parties to settle primarily to avoid costly litigation. “These are clearly interstate transactions, and the Constitution gives Congress the power to regulate this, and not the states,” he contends. The foundation receives funding from Google but says its views are not shaped by donors.

Texas emerged as a major antitrust player because it’s a large state with sizable resources and a conservative bastion that’s a longtime champion of free markets and limited government, Peacock adds. In fact, the Texas AG’s office played an early and central role in the Microsoft probe but dropped out before litigation was filed, Houck recounts. In recent years, Texas joined other states in antitrust actions against Apple and Bank of America. Since most AGs are elected, political calculations can factor into their decisions. “Everybody says that a state attorney general is a senator in training or a governor in training,” quips Foer. “A case that might generate a lot of publicity and bolster a future election bid “is a very appealing project for an attorney general.”

Abbott’s office faces several options: seek a settlement with Google (possibly after threatening or filing litigation) or tussle in court if no deal is reached; bring a case that mimics the FTC’s approach or one that focuses on a different, perhaps complementary, angle. If it lacks damning evidence, it can fold its inquiry. The level of state support for litigation might ultimately influence its choices. Foer thinks Abbott is unlikely to sue if he faces the prospect of going alone. Due to limited resources, state AGs “like to travel in packs and they like to share responsibilities,” he says. It’s even more imperative for states to band together if their proposed remedies vary substantially from those sought by the FTC. In that situation, “They don’t need fifty states, but they might need three or four fairly large ones,” he adds. Conditions stemming from a settlement or litigation could be crafted to apply to all states to ensure uniformity, sources say, but at the very least, they would apply to any states that unite with Texas.

Joaquin Almunia, the EU’s top antitrust regulator, has threatened a formal antitrust proceeding against Google that could trigger fines and restrictions if no agreement is reached, while FTC Chairman Jon Leibowitz recently said the commission will decide how to proceed by year’s end. Though the AGs have not publicly telecast their next moves, states have been known to steal the limelight. In 2009, New York filed an antitrust suit against Intel one month before the FTC followed with similar litigation. The chip maker later settled with both parties.

Adding to the pressure, Google’s relations with states are under strain. In February, 36 attorneys general wrote Google CEO Larry Page to voice concerns about the Internet giant’s privacy policies; last year the company forfeited $500 million to end a Rhode Island-led federal-state probe of online ads that facilitated illegal importation of prescription drugs; and in 2010, then-Connecticut Attorney General Richard Blumenthal, now a U.S. senator, led a 30-state investigation of the Wi-Fi scandal and criticized Google when it refused to hand over wireless data it gathered surreptitiously.

Critics cite these examples as evidence that Google is tone deaf to state regulators. “We're always open to constructive ideas for how we can improve,” replies a Google spokesman, who insists the company “always [aims] to be responsive to regulators’ concerns.” An antitrust suit led by Texas is certain to accomplish a goal that repeatedly eludes state officials: command Google’s undivided attention.